The Cambridge Weekly- 9th February

 

Despite being widely anticipated by markets, the decision resulted in drawdowns for key US indices and as a rise in the dollar. More significantly, the announcement caused a sharp change of fortunes for both gold and silver after their recent rallies. Following the announcement, gold fell almost 11% from its recent record highs, and silver fell 26%, a record one-day fall for the precious metal. Both metals began to recover over last week, a recovery that has been attributed to well-known investor behaviour of “buying the dip”.

Last week a significant trade agreement was reached between the US, the world’s largest economy, and India, the world’s fifth largest economy. The agreement sees the tariff on Indian exports to the US reduced from 25% to 18% following an agreement from Indian Prime Minister, Narendra Modi, that India would cease purchasing Russian oil. Markets reacted positively, as the Indian rupee rose 1.4% against the dollar and recorded its largest one-day gain in over five years.

 

US Equity Market:
Last week, US markets were dominated by resurfacing investor concerns revolving around the profitability and sustainability of AI investment from technology firms. Last Tuesday, the S&P 500 and Nasdaq indices fell 0.8% and 1.4% respectively, as big tech names such as Oracle, Nvidia and Microsoft all experienced losses. These drawdowns were further magnified by an exciting release from Anthropic, an AI company specialising in legal technology, who claim to have made a significant breakthrough in the use of AI in legal work. Investors reacted by selling off the stock of close competitors.

After releasing strong fourth quarter earnings, Alphabet, Google’s parent company, announced a significant increase in AI-related expenditure. The increase far exceeded analysts’ expectations and triggered a drawdown in the stock.

US retailer Walmart joined an exclusive 12-member club of public companies with a market capitalisation exceeding $1 trillion. The recent rally, which has seen the stock price more than double in the past two years, has been driven by high levels of investment in their ecommerce business line, set up to challenge Amazon.

Following a week of drawdowns, the S&P 500 and Nasdaq indices were down 0.09% and 1.87% respectively by market close on Friday. Notably, for the Nasdaq it was one of the worst weeks since last April’s tariff induced volatility.

UK Equity Market:
The FTSE 100 hit a new high last Wednesday, briefly surging beyond 10,400, before trading lower on Thursday, amid investor caution around the Bank of England rate decision. This climb was supported by GSK announcing robust quarterly revenues, alongside Shell who, despite slightly missing forecasts, announced a major $3.5 billion share buyback programme and dividend raise which lifted shares.

Elsewhere, Vodafone shares fell almost 9% last Thursday after a below-forecast revenue announcement. UK-based mining stocks also suffered as they experienced the shockwaves from the volatility experienced in broader precious metals indices earlier last week.

In the UK housing market, house prices ticked up 0.3% month on month over January, mostly reversing the 0.4% December fall. Conversely, demand for rental properties fell to its lowest level in seven years.

After a positive week, the FTSE 100 index closed the week to Friday up 1.43%. After strengthening over the week, the dollar now trades at around 1.36 against sterling.

Inflation, Interest Rates and Bond Markets:
The Bank of England (BOE) announced last Thursday that it would be holding interest rates at 3.75%. The vote, which was split five-four with four members voting in favour of a 25bps cut, was much tighter than economists initially expected, and is a further indicator that a rate cut looms on the horizon. In addition to the policy decision, the BOE announced that they predict that Consumer Price Inflation will fall back to its 2% target in the coming months, around a year earlier than initially forecasted.

The European Central Bank followed suit and elected to hold its benchmark interest rate at 2%. This decision came after recent stronger-than-expected Eurozone growth data, and marked the Bank’s fifth consecutive decision to hold. Core inflation for the region fell to 2.2% in January, its lowest level since 2021.

A private survey conducted by Challenger, Gray & Christmas revealed that that US-based employers cut over 100,000 jobs in January. Though the official US labour department release is not scheduled until Wednesday, the reduction represents the highest level of jobs cuts in January since 2009, and provides further evidence that the US jobs market may be weakening. Treasury yields showed little movement by close last Wednesday after initially dropping following the release of the jobs report.

What’s on the horizon
Markets will continue to closely monitor Kevin Warsh’s Senate confirmation process for Federal Reserve Chair, as this decision may provide investors with an indication of future US monetary policy.

This week brings further macroeconomic data releases. The US is due to announce its unemployment and inflation rate on Wednesday and Friday, respectively. Despite having been scheduled to announce nonfarm payrolls last week, the US rescheduled this also for Wednesday. UK GDP growth rates are expected on Thursday, while China’s midweek inflation figures will shed light on the health of the world’s second largest economy.

 

The Cambridge Team

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Source of financial market data: MorningstarDirect.